Eastern European central banks step in as currencies fall

Eastern European central banks may need heavier intervention in their currencies and further aggressive interest rate hikes to calm the impact on markets of the war in Ukraine, analysts have said. .

Hungary’s central bank raised its key rate by three-quarters of a percentage point to 5.35% on Thursday, a bigger-than-expected move and the biggest since 2008. Poland’s central bank intervened three times this week in bond markets. changes in an attempt to slow the slide of the zloty against the euro. The Czech central bank intervened on Friday to support the krone.

Hungary’s rate hike helped the forint recover from a record high of nearly 383 per euro on Wednesday, but on Friday it was testing that level again. The central bank did not intervene in the foreign exchange markets but said it was ready to do so “at any time”.

The zloty fell to over 4.86 to the euro on Friday morning, its lowest level since the global financial crisis, before the latest intervention helped it recoup some losses. It was trading at around 4.50 before Russia invaded Ukraine.

The Czech currency also fell sharply this week to more than 25.9 crowns per euro, down 5.6% from early February. Friday’s central bank intervention helped it recover to around 25.6 to the euro by late morning.

Liam Peach, emerging Europe economist at Capital Economics, said the three countries were exposed to significant inflationary pressures caused by currency depreciation, which is driving up the cost of imports at a time when commodity prices raw soar. “They are in the line of fire because they have the most important economic and financial ties with Russia and Ukraine,” he said.

All three could be forced to raise their key interest rates to 6 or 7% by the middle of the year, he added, levels that would have been “unthinkable a few months ago”.

He warned that the countries of Central and Eastern Europe were more exposed than any country in the world, with the possible exception of the United States, to an inflationary spiral of wages and prices, given their markets. tight labor markets, large imports of consumer goods from Western Europe leading to a high impact on inflation from currency depreciation and the fact that central banks have been slow to raise their key interest rates .

Real interest rates are deeply negative across the region. Inflation in the Czech Republic is around 10%, while the central bank rate is 4.5%. Inflation in Poland is above 9% against a key rate of 2.75%. Inflation in Hungary is around 8%.

Arthur Budaghyan, chief emerging markets strategist at BCA Research, said investors were not positioned for further declines in the zloty and recommended selling it short against the US dollar.

“The proximity of war, especially for Poland, makes it vulnerable,” he said, adding that the pressure on currencies and other assets would spread to other emerging markets if the war did not end. quickly.

“Those most vulnerable and closest to the epicenter are hit first and only over time will sales spread,” he said. “The conflict is unlikely to end overnight and I suspect investors will become more nervous. I don’t think the emerging market sell-off is over.”

Mary I. Bruner